Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

My Thoughts

Can the Big Banks Survive Coronavirus?

Many investors will ask can the big banks survive coronavirus, because of recent history.

Remember, the last time the financial system received a major shock (in 2007 and 2008) only federal action prevented a wave of big bank collapses. For example, the US treasury nationalized the mortgage banks Fannie Mae and Freddie Mac on 7 September 2008. Additionally, a major investment bank, Lehman Brothers, collapsed completely in September 2008.  

In fact, the US Economy almost collapsed on September 17, 2008, after the bankruptcies of Lehman Brothers and the insurance goliath AIG (NYSE: AIG).  By 18 September 2008, the U.S. Federal Reserve was insuring money market accounts to prevent bank failures.

Finally, on 26 September 2008, a major consumer bank; Washington Mutual popularly known as WaMu, went bankrupt. To clarify, WaMu collapsed because depositors withdrew $16.7 billion in 10 days. Ultimately, they sold WaMu to JPMorgan Chase (NYSE: JPM) for just $1.9 billion.

Only the Federal Deposit Insurance Corporation (FDIC) saved banks by guaranteeing $1.3 trillion in loans to prevent collapse.

Can the Banking System Survive the Coronavirus?

Given that history, it is a good time to ask how safe and healthy are the banks? A good way to answer that question is to look at the finances of America’s largest bank; JPMorgan Chase & Co. (NYSE: JPM).

On 31 March 2020, JPMorgan’s financial numbers were a mixed bag. For instance, Chase reported quarterly revenues of $32.973 billion on that day.

However, JPMorgan reported a negative revenue growth rate of -9.82% for the quarter ending on 31 March 2020. Yet, Chase reported a gross profit of $28.251 billion and an operating income of $3.116 billion for the same quarter.

The quarterly gross profit and operating income fell from $28.331 billion and $10.565 billion on 31 December 2019. Plus, the quarterly revenues fell from $33.587 billion to $32.973 billion in the same period. Finally, the quarterly common net income fell from $8.091 billion to $2.431 billion in the same period.

Is Coronavirus Hurting JPMorgan Chase?

I wonder if the drops in income, revenue, revenue growth, and gross profit indicate coronavirus was affecting JPMorgan Chase’s finances in first quarter 2020.

I think JPMorgan’s revenues shrank because China shut down its economy to contain coronavirus in January and February. I think the lack of Chinese economic activity reduced Chase’s ability to make money in the first three months 2020.

Thus, JPMorgan will make less money this quarter because coronavirus has shut down the European, America, and other economies. On the other hand, the Chinese economy is restarting. Therefore, Chase could make more money as China comes back online.

Notably, Stockrow did not post JPMorgan’s cash flow numbers for the last quarter on 22 April 2020. However, Stockrow posted Chase’s income numbers for the last quarter on that day.

However, JPMorgan had $1.165 trillion in cash and short-term investments and total assets of $3.129 trillion on 31 March 2020. Those numbers grew from $923.891 billion and $2.697 trillion on 31 December 2019.

Thus, JPMorgan Chase is making less money than at the end of 2019, but it has more cash. Hence, I think JPMorgan Chase is healthy and will survive.

Is JPMorgan Chase a Good Investment?

In the final analysis, I think JPMorgan Chase (NYSE: JPM) is a good stock because of all the cash it has. The cash gives Chase a large margin of safety.

Additionally, Chase paid a 90₵ quarterly dividend on 22 April 2020. Consequently, each Chase share offered a dividend yield of 3.97%, an annualized payout of $3.60, and a payout ratio of 68.06% on 27 April 2020. Plus, JPMorgan Chase dividends have grown for the last nine years.

Given these numbers, I think Mr. Market fairly priced Chase fairly at $94.62 a share on 27 April 2020. Hence, I consider JPM a good value stock in today’s environment.

Will Coronavirus get worse?

JPMorgan Chase’s financial numbers show our banking system is in good shape and surviving a coronavirus shock now. However, I do not know if the banks or any other institution could survive six to 18 months of coronavirus.

Frighteningly, some experts think the coronavirus crisis will get worse in the coming year. “There’s a possibility that the assault of the virus on our nation next winter will be even more difficult than the one we just went through,” Robert Redfield, the director of the Centers of Disease Control and Prevention (CDC), told The Washington Post.

Furthermore, Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, estimates it could take 12 to 18 months to create a coronavirus vaccine. Thus, the crisis could continue for a year and get worse.

Prepare for 18 Months of Coronavirus

“The four seasonal coronaviruses do not seem to induce long-term immunity,” Gregory Poland told MarketWatch. Poland is a vaccine expert at the Mayo Clinic. Thus, coronavirus shutdowns and economic disruptions could continue for a year.

Given that potential reality, all investors need to get ready for a bumpy ride in the market. One way to prepare for that ride is to hold cash rich stocks with high margins of safety such as JPMorgan Chase & Company (NYSE: JPM). I think the banking system will survive, but that survival will be rough.

Investors need to get ready for a lot of pain because coronavirus will wreak havoc on the economy for the foreseeable future.